Should Private or Government Capital Bail Out Fannie and Freddie?

Thursday, 10 Jul 2008 | 5:07 PM ET

SHARES

We asked our panel:

Should Private or Government Capital Bail Out Fannie and Freddie?

Results:PRIVATE 11GOVERNMENT 1

The Kudlow Caucus Breakdown

PRIVATEStefan AbramsManaging Partner, Bryden-Abrams Investment ManagementIdeally, the inevitable recapitalizations of Fannie and Freddie should be accomplished with private capital, but my own view is that the need will be so great that in the end each of us taxpayers will be “lucky” enough to be forced to participate.

GOVERNMENTJoe BattipagliaMarket Strategist, Stifel NicolausSince the government has an implicit guarantee behind Fannie and Freddie, they’re the ones who should provide the bailout and should benefit by way of their equity stake if it’s recovered.

PRIVATEJared BernsteinSenior Economist, Economic Policy InstituteI’d rather private capital do it, but the fact is they’re TBTF (too big to fail), so the bail-out bucket brigade should be at-the-ready. BTW, the question we should be asking ourselves is how’d we get here in the first place. Answer: housing bubble. Solution: better oversight and management of mortgage markets. Moral: the time to worry about moral hazard is not the weekend when the bank is failing.

PRIVATEJerry BowyerChief Economist, Benchmark Financial NetworkHow long must the failed policies of LBJ hang around the neck of this country? Johnson created Fannie and Freddie in the late 60s to pay for the Vietnam war and the creation of a giant welfare state. Both failed. It’s time to cut Fannie and Freddie off entirely. Instead of talking about giving them another umbilical cord into the body politic, we should be cutting the existing line of credit. Fannie and Freddie are a giant slush fund for the urban vote-buying sub-prime industrial complex and its congressional masters.

PRIVATEVince FarrellScotsman Capital ManagementIdeally private capital should be used. If the situation is as dire as the plunging stocks indicate there will be no time to line up private capital. If a bailout is required, the common shareholders should not be bailed out. The common should be wiped out. The debt has to be supported since so much of the mortgage structure is connected. A "reprivitization" should be undertaken as soon as possible.

PRIVATEJim LaCampPortfolio Manager, Portfolio Focus, RBC Wealth ManagementCo-Host, Opening Bell Radio Show, Biz Radio NetworkIt's time to allow all the handcuffed capital sitting on the sidelines to enter our broken financial system. Throw in a cap gains break for private equity to invest in the troubled banking and financial sectors and you solve a lot of the issues.

The problem is that these "Quasi-agencies", these "implied credits" have been allowed to run bad balance sheets, because of the implied backing. They desperately need capital, and private equity, oddly enough, would create better accountability here.

PRIVATEArt LafferFmr. Reagan Economic Advisor Chief Investment Officer, Laffer InvestmentsI don’t know that they should be bailed out by anyone, but they certainly should not be bailed out by the public (government).

PRIVATEDonald L. LuskinChief Investment Officer, Trend Macrolytics LLCThis is an impossible question for those who believe in free-markets, because Fannie and Freddie are both already monstrous hybrids of private and government capital. As publicly traded companies, they are ostensibly privately capitalized. Yet with strong implicit government guarantees, they are in fact ultimately capitalized by government. A little bit pregnant, to be sure.

But if you hold a gun to my head, then the marginal dollar should always be a private dollar. Long term, let’s see if we can get the government out of the deal entirely.

PRIVATESteve MooreSr. Economics Writer, The Wall Street Journal Editorial BoardGovernment capital should not bail out Freddie and Fannie but the government will almost certainly step in to bail them out.

PRIVATEJames PethokoukisSr. Writer, U.S. News & World Report (Money & Business) Private capital if they can get. If am deepy worried that we are on the verge of a bailout binge (Fannie, Freddie, homewoners, GM, etc.) not seen since the Great Depression, with maybe some nationalizations tossed in. Big Government, Big Spending, Big Regulation = Big Trouble.

PRIVATERobert ReichFormer Labor Secretary Professor of Public Policy, UC Berkeley Fannie and Freddie's investors should bear the costs, but as a practical matter they won't. Fannie's and Freddie's loans are assumed to be guaranteed by the government even though technically and legally they aren't, and investors will demand that government bail them out. Congress will cave.

PRIVATEGary ShillingA. Gary Shilling & Co. President I think that’s unlikely without an explicit or implicit guarantee from the government very much as Fannie and Freddie already have.